Market Power, Financial Distress, Institutional Ownership, and Modified Real Earnings Management: The Moderating Role of Information Asymmetry in Indonesia

Aqamal Haq; Etty Murwaningsari; Sekar Mayangsari

doi:10.59261/inkubis.v8i4.535

Authors

Aqamal Haq Universitas Trisakti, Indonesia
Etty Murwaningsari Universitas Trisakti, Indonesia
Sekar Mayangsari Universitas Trisakti, Indonesia

DOI:

https://doi.org/10.59261/inkubis.v8i4.535

Keywords:

Modified Real Earnings Management, Market Power, Financial Distress, Institutional Ownership, Information Asymmetry

Abstract

Background: Managers can raise reported earnings through real operating decisions, not accruals alone, and outsiders struggle to detect this when the information environment is opaque. In emerging markets such as Indonesia, market power, financial distress, and institutional ownership may each shape this behavior, yet are rarely examined jointly.

Objective: This study examines whether market power, financial distress, and institutional ownership are associated with Modified Real Earnings Management (Modified REM), and whether information asymmetry conditions these relationships.

Methods: The analysis uses a balanced panel of 624 firm-year observations from 312 production-oriented non-financial firms listed on the Indonesia Stock Exchange during 2023-2024. The primary dependent variable is Modified REM, which extends the conventional Roychowdhury (2006) composite with abnormal corporate social responsibility (CSR) expenditure. Firm fixed-effects regressions with White robust standard errors include interactions between information asymmetry and each determinant.

Results: Market power (coefficient = 4.90; p < 0.001) and financial distress (coefficient = 0.0786; p = 0.0059) are positively associated with Modified REM, whereas institutional ownership is insignificant. Information asymmetry strengthens the market-power association (interaction = 11.19; p < 0.001) but not the financial-distress association, while the institutional-ownership interaction is negative and significant (-4.32; p = 0.0089). Conclusions are unchanged under conventional Roychowdhury REM.

Conclusion: The study places Modified REM at the center of the determinant model by adding abnormal CSR expenditure as a distinct real-activity channel, while showing that information asymmetry is a mechanism-specific rather than universal moderator of product-market discretion, financial pressure, and institutional ownership.

Downloads

Download data is not yet available.

References

Abad, D., Cutillas-Gomariz, M. F., Sánchez-Ballesta, J. P., & Yagüe, J. (2018). Real earnings management and information asymmetry in the equity market. European Accounting Review, 27(2), 209–235. https://doi.org/10.1080/09638180.2016.1261720

AL-Duais, S. D., Malek, M., Abdul Hamid, M. A., & Almasawa, A. M. (2022). Ownership structure and real earnings management: Evidence from an emerging market. Journal of Accounting in Emerging Economies, 12(2), 380–404. https://doi.org/10.1108/JAEE-01-2021-0008

Al-Faryan, M. A. S. (2024). Agency theory, corporate governance and corruption: an integrative literature review approach. Cogent Social Sciences, 10(1), 2337893.

Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–609.

Bushee, B. J. (1998). The influence of institutional investors on myopic R&D investment behavior. The Accounting Review, 73(3), 305–333.

Chang, H.-Y., Liang, L.-H., & Yu, H.-F. (2019). Market power, competition and earnings management: Accrual-based activities. Journal of Financial Economic Policy, 11(3), 368–384. https://doi.org/10.1108/JFEP-08-2018-0108

Chouaibi, Y., & Zouari, G. (2022). The effect of corporate social responsibility practices on real earnings management: Evidence from a European ESG data. International Journal of Disclosure and Governance, 19(1), 11–30. https://doi.org/10.1057/s41310-021-00125-1

Chung, R., Firth, M., & Kim, J.-B. (2002). Institutional monitoring and opportunistic earnings management. Journal of Corporate Finance, 8(1), 29–48.

Cohen, D. A., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2–19. https://doi.org/10.1016/j.jacceco.2010.01.002

Dang, D. Q., Korkos, I., & Wu, W. (2023). The effects of earnings management on information asymmetry and stock price synchronicity. Cogent Economics & Finance, 11(2), 2290359.

Datta, S., Iskandar-Datta, M., & Singh, V. (2013). Product market power, industry structure, and corporate earnings management. Journal of Banking & Finance, 37(8), 3273–3285. https://doi.org/10.1016/j.jbankfin.2013.03.012

Davis, J. G., & García-Cestona, M. (2023). Institutional ownership, earnings management and earnings surprises: evidence from 39 years of US data. Journal of Economics, Finance and Administrative Science, 28(56), 218–236.

Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1–3), 3–73.

Gu, X., An, Z., Chen, C., & Li, D. (2023). Do foreign institutional investors monitor opportunistic managerial behaviour? Evidence from real earnings management. Accounting & Finance, 63(1), 317–351.

Gunny, K. A. (2010). The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27(3), 855–888. https://doi.org/10.1111/j.1911-3846.2010.01029.x

Habib, A., Bhuiyan, B. U., & Islam, A. (2013). Financial distress, earnings management and market pricing of accruals during the global financial crisis. Managerial Finance, 39(2), 155–180. https://doi.org/10.1108/03074351311294007

Hasan, M. M., Hossain, M. S., & Gotti, G. (2022). Product market competition and earnings management: the role of managerial ability. Review of Accounting and Finance, 21(5), 486–511.

Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1–3), 405–440.

Healy, P. M., & Wahlen, J. M. (1999). A Review of the Earnings Management Literature and Its Implications for Standard Setting. Accounting Horizons, 13(4), 365–383. https://doi.org/10.2308/acch.1999.13.4.365

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X

Kałdoński, M., Jewartowski, T., & Mizerka, J. (2020). Capital market pressure, real earnings management, and institutional ownership stability - Evidence from Poland. International Review of Financial Analysis, 71, 101315. https://doi.org/10.1016/j.irfa.2019.01.009

Kušter, D. (2023). Construction of bankruptcy prediction model using discriminant analysis and financial ratios. Ekonomija-Teorija i Praksa, 16(1), 1–22.

Lemma, T. T., Negash, M., Mlilo, M., & Lulseged, A. (2018). Institutional ownership, product market competition, and earnings management: Some evidence from international data. Journal of Business Research, 90, 151–163. https://doi.org/10.1016/j.jbusres.2018.04.035

Mlawu, L., Matenda, F. R., & Sibanda, M. (2026). Financial distress as a driver of accrual earnings management: insights from South Africa’s JSE-listed firms. Cogent Business & Management, 13(1), 2655973.

Muljono, D. R., & Kim, S. S. (2018). Impacts of financial distress on real and accrual earnings management. Jurnal Akuntansi, 22(2), 222–238. https://doi.org/10.24912/ja.v22i2.349

Nguyen, T. T. H., Ibrahim, S., & Giannopoulos, G. (2023). Detecting earnings management: a comparison of accrual and real earnings manipulation models. Journal of Applied Accounting Research, 24(2), 344–379.

Paiva, I., Viana Jr, D., Lourenço, I., & Nunes, R. (2026). Earnings management and financial distress: European evidence. International Journal of Accounting & Information Management, 34(2), 362–384.

Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370. https://doi.org/10.1016/j.jacceco.2006.01.002

Sakaki, H., Jackson, D., & Jory, S. (2017). Institutional ownership stability and real earnings management. Review of Quantitative Finance and Accounting, 49(1), 227–244.

Sanusi, F., Januarsi, Y., Purbasari, I., & Akhmadi, A. (2023). The discipline vs complement role of product market competition and market power: Evidence from real earnings management in an emerging market. Cogent Business & Management, 10(1), 2170072. https://doi.org/10.1080/23311975.2023.2170072

Zang, A. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675–703. https://doi.org/10.2308/accr-10196